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ILS issuance increases as spreads decline dramatically in Q4 2009; strong outlook for 2010


Aon Benfield Securities today releases its latest quarterly report on the Insurance-Linked Securities market, which reveals that a tightening in spreads encouraged new issuances among repeat sponsors in Q4 2009.

The Insurance-Linked Securities – Fourth Quarter Update, highlights that a total of $3.4 billion of ILS transactions closed during the year, including $1.6 billion in the fourth quarter alone. The three months witnessed a dramatic reduction in spreads, most prominently in the US Wind and Multi-Peril sectors, which decreased by 36% and 26% respectively on a non-seasonal adjusted basis. This trend is in contrast to the high spreads witnessed during 1H 2009.

The decline in spreads spurred activity among repeat issuers, which had transactional structures in place to enable them to quickly take advantage of the improved pricing environment. Only two new cat bond sponsors came to the market in 2009.

Secondary trading remained at average levels during Q4, as investors chose to allocate capital to new issuances rather than trading in existing ILS products.

Paul Schultz, President of Aon Benfield Securities, said: “The high spreads witnessed during the first half of the year deterred many potential new sponsors from entering the market, as traditional reinsurance solutions were considered more economical. However, with spreads improving during Q3 and Q4, those with structures already established were well placed to react to the improved conditions in the ILS market. The fourth quarter was especially active, as Aon Benfield Securities underwrote and placed three issues with a notional amount of $510 million on a currency adjusted basis. This includes a $225 million transaction transferring commercial California earthquake risk to the capital markets on an indemnity basis.”

Money market funds, which offer conservative collateral structures and are less dependent on counterparties’ credit ratings, were the most popular form of collateral management for ILS products during Q4.

The period saw continued emphasis on ILS solutions covering U.S. exposures, with price declines occurring across those covering perils in non-U.S. geographies. In 2009 as a whole, issuance for U.S. perils represented 80% of the total ILS market, followed by issuance for Japan and Western European perils.

The use of an industry index loss trigger was by far the most popular mechanism for cat bonds in 2009.

Mr. Schultz added: “In both U.S. and non-U.S. markets, improved conditions have broadened the new issuance pipeline as sponsors have sought to access capacity at increasingly competitive prices. From an investor perspective, we expect to see a trend towards the use of the collateralized reinsurance market to fill risk buckets and return profiles which are currently unavailable in the ILS market.”

Aon Benfield Securities forecasts that ILS issuance volumes will grow during 1H 2010, as approximately $2bn of transactions come off-risk and sponsors seek to replace the capacity via capital markets solutions.

Aon Benfield Securities is the marketing name for the broker-dealer business of Aon Corporation (NYSE: AON), which operates principally through Aon Corporation’s indirect, wholly-owned subsidiaries Aon Benfield Securities, Inc. in the U.S. and Aon Benfield Securities Limited in the U.K.


About Aon Benfield
As the industry leader in treaty, facultative and capital markets, Aon Benfield is redefining the role of the reinsurance intermediary and capital advisor. Through our unmatched talent and industry-leading proprietary tools and products, we help our clients to redefine themselves and their success. Aon Benfield offers unbiased capital advice and customized access to more reinsurance and capital markets than anyone else. As a trusted advocate, we provide local reach to the world’s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial, and rating agency advisory, and the right professionals to advise clients in making the optimal capital choice for their business. With an international network of more than 4,000 professionals in 50 countries, our worldwide client base is able to access the broadest portfolio of integrated capital solutions and services. Learn more at

About Aon Benfield Securities
Aon Benfield Securities, a global investment bank exclusively dedicated to the re/insurance industry, provides advice on strategic and capital alternatives and mergers and acquisitions. We are a recognized leader in the structuring, underwriting and trading of insurance-linked securities, and the financing of re/insurance companies, including Lloyd’s syndicates. We employ more than 35 professionals, with offices in Chicago, New York, London and Tokyo. Aon Benfield Securities also enjoys the advantages inherent in its integration with Aon Benfield, which provides Aon Benfield Securities with access to analytic, modeling and rating agency expertise through Aon Benfield’s network and ensures that our clients can access the broadest portfolio of integrated capital solutions and services.


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